Monday, October 01, 2007

Did Orrin Hatch cause the sub-prime mortgage meltdown?

Well, okay. I admit the title of this piece is a blatant example of hyperbole. I just wanted to get your attention. But bear with me for a minute, and you will see what I mean.

In 2005, Congress passed into law “The Bankruptcy Abuse Prevention and Consumer Protection Act”. The chief cheerleader for this bill was Senator Hatch. At the time the Senate passed it, Hatch was quoted as saying, “This bill is about fairness and accountability. Bankruptcy claims have skyrocketed since the last major bankruptcy reform bill in 1978. We all know about the abuses of the system. Well, that is about to change for the better… I do believe (the bill) will reduce the number of fraudulent and abusive filings and help educate consumers to keep their financial houses in order.” The main purpose of the bill, which was heavily lobbied for by banks and other financial institutions, was to make it more difficult to file for bankruptcy.

Sounds great. However, the opponents of the legislation had a warning for us. They reminded us that bankruptcy laws, among other things, provide an important check and balance against fraudulent loan practices. If there is a chance that investors won’t get their money back because a consumer is lured into signing up for a loan they don’t have the ability to repay, the possibility of a bankruptcy declaration would help put the brakes on such practices. The potential of the borrower declaring bankruptcy forces lenders to be more careful in approving loans and more truthful about the risks. They also argued that despite the title of the bill, the specifics of it were long on roadblocks to bankruptcy filings and short on protecting consumers. The critics claimed the proposed legislation would shield dishonest financial institutions from the consequences of their own unwise and deceptive lending practices.

Fast forward two years, and the opponents of the 2005 bankruptcy reform legislation sound eerily prophetic. One cannot argue that the explosion of the type of teaser mortgages that have been the root cause of the massive increase in foreclosures started about the time the bankruptcy law was passed. Financial analysts have marveled how mortgage investors demanded amazingly little in risk premium for what was, in retrospect, a disaster waiting to happen. That “irrational exuberance”, as Alan Greenspan puts it, was unquestionably encouraged by the fact that the victims of these loans would find it more difficult to declare bankruptcy.

Senator Hatch and other conservatives seem to think it is solely the responsibility of the consumer to detect and protect themselves from fraudulent loan practices. An alternate view is that you shouldn’t need a PhD in finance to get a loan; that a middle class blue collar worker with a trusting nature and a moderate level of education should be protected from con men in pinstripe suits who would take unfair advantage of a young family’s dream of owning a home.

I think Senator Hatch’s heart is in the right place. I was gratified to see that he not only voted for the SCHIP bill expanding health care for children, but publicly chastised President Bush for being on the wrong side of that issue. However, the 2005 bankruptcy reform bill poses a question. Should the government’s primary responsibility be to protect big business from the consumer, or to protect the consumer from big business?

With all due respect, I think we know which side of that question Senator Hatch comes down on.

7 comments:

pramahaphil said...

Good Post!

At first I was wondering what kind of BS you were peddling.

The other issue that I think needs to happen is loan origination companies need to brought under a more watchful eye (under the SEC or something)

During the boom here in Southern Utah, middle class families were being put into 300k subprime loans left and right with little or no explanation of what would happen in a few years if they didn't refinance the loan or sell the home out of the loan, and NO effort to determine whether the homebuyer could afford a 300k+ home. That type of malfeasance in any other profession would lead to expulsion from practice, yet loan peddlers were almost entirely unregulated and unfettered during that period. Now the buyers are left picking up the pieces. We lost one family to foreclosure from our ward this week, and I wonder how many more.

Anonymous said...

Steve,

It is ultimatly up to the consumer to know what is best for them...it is not that hard to read the writing on a mortage contract or bank loan.

We don't the govt to hold our hands.

As usual, your writing are way out in left field and represent the views of everyday people.

You're just another left wing intellectual speaking his mind.

Voice of Utah said...

Steve, please stop representing the views of everyday people.

Jeremy said...

Anonymous,

I'd agree with you if the government's policy of bailing out stupid lenders weren't in place. We encourage lenders to make bad loans with the virtual garantee that government will eventually save them if things go bad. If lenders get government protection why shouldn't borrowers get protection as well in the form of bankruptcy?

I'd prefer to get away from corporate welfare and liberal bankruptcy protection laws. Since the coroporate welfare doesn't seem likely to go away I'm all for more protection for consumers. Steve is absolutely right.

LT said...

Steve--

Are you kidding me? I'm no defender of Senator Hatch's but the bankruptcy law and Senator Hatch had little if anything to do with the current subprime mess.

Sadly, Utah Amicus has become more interested in scoring political points than discussing real policy.

You state, so emphatically, that teaser mortgages started about the time the bankruptcy bill passed. WRONG!! Subprime mortgages and teaser rates started well before 05.

The real problem is the securitization and issuing of mortgage based securities. Although securitization has introduced liquidity into the marketplace which has been a positive to the economy it has also led to the loosening of credit and down payment standards.

There are valid concerns with the bankruptcy bill and the current state of regulation in the financial industry but your rant did little to discuss the real concerns.

Let's discuss real policy rather than trying to score cheap points.

democat said...

Steve it wasn't Hatch's fault only.

It was the "Secret Combination" in the republican party that has ruled the nation and this state for for the past 20 years, that created the this mess in Amererica and Utah and overseas.

Anonymous said...

Senator Hatch shouldn't have voted for SCHIP either. Anything that looks and smells like more socialism, is bad thing. Senator Hatch should know better given the VAST amounts of council the prophets and apostles of the church have given against these things.

One should not have allegience to a party. One should have allegience to correct principles--and to do that, one must find them first. I think Senator Hatch needs to study up on correct principles before he compromises his way to hell any further ....